Sunday, 20 February 2011

The past week has seen a number of policy announcements and other political developments by the government in Greece, as well as by individual politicians, which leaves most observers with the sense that the governing party has lost all sense of reality.

One such announcement was the apparent creation of a Centre for Democracy. This was reported in press on Thursday, 17 February, as an outcome of a meeting between the Greek Minister of Foreign Affairs Dr. Dimitris Droutsas with his British counterpart, William Hague. The Greek Foreign Minister heralded the creation of a Centre for Democracy, to be located in Crete. This centre would apparently teach unnamed members of Arab states about democracy, good governance, and social justice.

Such a proposal, coming from the political party which has ruled Greece for many of the disastrous past 30 years, and which is proportionally responsible for the crisis Greece finds itself in, is ironic in ways that not even Socrates could contemplate. The fact that the present government has either refused to prosecute major bribery cases (e.g. Skaramanga) or has implicated its own high-ranking former officials as being recipients of bribery, was perforce overlooked by the Foreign Minister in the press conference.

Yet these are the facts. If the record of governance and social justice is anything to go by, it hardly seems likely that PASOK will teach “the Arabs” about these issues–except perhaps how not to govern. One would have hoped Dr. Droutsas’ international experience and knowledge of history would have been enough to engender a little more humility and common sense. Apparently not.

The irony is of course compounded when one realizes in what dire straits the Hellenic Ministry of Foreign Affairs finds itself. The Greek ambassador to Nairobi has complained of unpaid salaries and a cut-off of electricity due to unpaid bills. A Greek embassy in a Scandinavian country recently had its electricity disconnected, because the Embassy had not paid the bill. Other embassies apparently face eviction due to unpaid rent.

The ultimate question, of course, is whether this is an effective a use of taxpayer’s money. Greece owes over EUR 340 billion. Salaries and pensions have been cut; suppliers and temporary staff are unpaid. Who is going to pay for this Centre, and what tangible economic benefits will Greece receive from it?

It seems to be yet another waste of money, a diversion of focus on the key areas of implementing domestic reform and badly-needed foreign investment. Instead of real economic reform, the government incessantly launches glowing initiatives which it can not pay for, and for which it has no credibility. This is hardly a prescription for economic recovery. Greek citizens should not be surprised if our international creditors meet requests for more funding with hesitation, if not mirth.

Friday, 18 February 2011

The past seven days in Greece have been marked by the furor over a public disagreement between the Troika and the Greek government on the former’s suggestion that the latter embark on a EUR 50 billion privatisation programme as a means of gaining additional funds for debt reduction.

The controversy apparently originated with European Commission representative Servaas Deroose, who in interviews apparently suggested that Greece

"sell" beach-front land, listed publicly controlled enterprises like electricity utility Public Power Corp., and engage in a massive sell off program of state portfolio holdings and real estate to raise EUR50 billion from privatizations by the end of 2015. The effort is deemed as absolutely necessary to reduce the nations EUR 330.1 billion debt, according to Deroose's comments.(Greek Finance Minister Criticizes EU’s Asset Sale Comments. Dow Jones Newswires, 13.02.2011)

What was controversial was not only the timing and manner of the Troika’s announcement, which was widely interpreted as being in the imperial (or imperious) manner of giving orders, but also the scale and timing of the plan. The number “50 billion” took most people by surprise, although there is some evidence that the government had already agreed to this in prior discussions with the Troika.

The government reaction was swift. Prime Minister Papandreou called IMF President Dominique Strauss-Kahn to complain; strident statements were issued by the Government spokesman; a political uproar ensued among the political parties and media. On Tuesday, the Prime Minister, in an apparent fit of panic, announced the drafting of a law to eliminate all sales of public land or assets to the private sector without an Act of Parliament.

Most observers in Greece and elsewhere were probably caught by surprise by the scale of the hostile reaction. After all, the government itself has already committed itself, on 2 June 2010, to an aggressive privatisation plan with an approximate value of EUR 7 bln (available on the Hellenic Ministry of Finance’s website). This plan includes a mix of listings (IPOs), minority share sales, leases, and public-private partnerships involving the following organisations:

·Agricultural Bank of Greece

·Airports, Ports and OSE

·Sewerage and Water Companies

·Energy Companies, including DEH, DEPA and ELPE

·Telecommunications (OTE)

·Games (OPAP, Casinos)

·Real Estate holdings by KED, OSE and Olympic Properties.

The actual situation, however, is far more complex. One could summarise the shocked reaction of the government due to the following, pervasive political sensitivities, which should not be ignored or underestimated:

a.The government’s privatisation programme does not include outright, majority share or asset sales as a main policy objective. Instead, it relies on a mix of instruments which are designed to retain public control over the asset in question. For instance, the public shareholding of TrainOSE will remain at 51%; 49% will be sold to a strategic investor. The public shareholding in the Public Power Company (DEH) will remain at 51%, but wholesale and retail markets will be “opened”. This reflects a core political belief within PASOK that the state must continue to play a dominant role in the ownership of what it calls public goods. It is also the reason why, under its current form, it is highly unlikely a privatisation effort will succeed (more on this later).

b.The public reaction to asset sales to the private sector brings with it the spectre of corruption. The Vatopedi scandal, in which a monastery in northern Greece managed to exchange almost worthless marshland into a portfolio of public property which by most estimates was valued at over EUR 200 million is an ongoing scandal in Greece, for which no criminal or civil responsibility has been assigned (the legal investigation is theoretically ongoing, but has been politicised by the Parliamentary inquiry into the affair).

c.Even the partial privatisation of state-owned enterprises like the Public Power Company or the Agricultural Bank of Greece comprise a major political risk for the government. Labour unions such as GENOP (part of DEH) retain very real political influence, particularly within PASOK, and are no strangers to militant action. These unions have been well-trained and deployed in drastic opposition tactics by PASOK against the Karamanlis and Mitsotakis governments, and now have no compunction about using these same tactics against PASOK. The highway blockades mounted by farmers and truckers, the public transport strikes and the current strike by DEH are all indications of this. While any one privatisation would be expected to create significant social tension, PASOK’s privatisation plan calls for the partial sale or liberalisation of no less than 16 major entities. This is a recipe for political disaster, to put things mildly.

For this reason, I believe that on the one hand, the government has made a series of critical mistakes in its privatisation and liberalisation policy. But on the other hand, it is nearly inconceivable that Greece will manage to sell (or “exploit”) EUR 50 billion in the next five years. My reasons are the following:

Government (Regulatory) Side

·The political risk to proceeding with partial privatisation of DEH, let alone 15 other entities, is massive. I believe that PASOK’s chances of successful implementation in the face of political opposition will be less than 15%, while its chances of actually devising an attractive and sustainable investment plan for these entities are close to zero.

·The terms of investment are fundamentally unattractive. No investor in their right mind will purchase 49% of a state organisation, leaving the remaining 51% in the hands of an unstable government which is reluctant to face down militant, left-wing unions. PASOK would be better off examining outright liquidation or a 100% sale, but this is politically impossible for them to contemplate.

·The requirement for Act of Parliament to approve transfer or partial privatisation is an act of investor genocide, to put it mildly. No responsible investor is going to put the success or failure of their investment in the hands of a parliamentary vote. This will be a future disincentive to investors as well, since we can assume that political turbulence will increase in the future, and that eventually a consortium government may come into being.

·Poor planning and prioritisation. So far, the government has not come up with a convincing plan for privatisation and liberalisation. Its moves have been dictated by the Troika and, to a greater extent, by internal resistance. The failed Astakos deal is indicative of the lack of strategic planning in national investment policy; the delays in the Hellenikon investment are indicative of the difficulties in gaining investor confidence given unrealistic valuations and competing and incoherent investment objectives.

Market (Demand) Side

·The greatest threat on the market side is, quite simply, the lack of trust by international investors. So many have been “burned” by fickle Greek policy in the past decade that it will take more than a nice policy paper to make serious money sit down with the government. The recent “I won’t pay” initiative, which saw drivers going through toll gates (owned by Vinci or Grupo ACS) without paying, and without any substantial reaction by the government, is a case in point. Other black marks include

§the regular closure of ports, highways and border crossings by any number of special interest groups (truckers, farmers, dockworkers)

§the attempt, in October – December 2009, by the new PASOK government to renegotiate the COSCO deal

§the lack of any continuity in government policy and planning between administrations of different ideologies

§the lack of a clear investment regime, and the ability of entities like the Council of State’s recent decision against the “Integrated Tourism Resort” concept and the impact on major investments like Costa Navarino

§the constant sniping and harassment by left-wing deputies and unionists, and their apparent legal immunity even when committing gross misdemeanors and crimes.

·The second greatest threat on the market side is the economic recession and, more seriously, the impending default by the Greek government. No serious economic observer believes that Greece can survive without a default: the longer Greece and the European Union take to reach a realistic settlement on Greek debt, the longer investors will take to commit themselves. The current economic climate favours waiting until the recession and default push asset values down still further. Time favours the investor.

·The third greatest threat on the market side is the fact that Greece does not have any visible competitive advantages against other investment destinations. A competitive advantage is one which enables a supplier to generate superior profitability against competing suppliers in the same segment. If anything, Greece is losing competitive advantage:

§There is practically no connection between the education system and the workforce. This creates major distortions and the need for expensive re-training for either academic or vocational disciplines;

§Government regulation is often neither logical nor not well adapted to the 21st Century economy. Government services rarely provide value-adding services: there is an authorisation-based public sector culture which creates long delays, provides a means of collecting bribes, and constitutes an important human resource burden and financial expense for companies;

§The government dominates certain economic fields and does not permit real competition in others;

§The judiciary and legal system is in a shambles. It is practically impossible to enforce a contract without high costs and long delays (often lasting several years);

§The cost of capital is high given the financial crisis affecting the country;

§The system of public subsidies has created overcapacity in nearly every sector: pricing power has been destroyed;

§Domestic demand is falling as the third year of the recession takes hold and households are hit by declining credit availability and surging unemployment;

Credit Side

All other points aside, a further major threat is the lack of international capital, and the lack of real marketable assets in Greece. The total value of government holdings in listed companies is probably less than EUR 10 bln at current valuations, while the value of government land, though high in book value, will be extremely difficult to realise given the global oversupply of commercial and residential real estate. The Financial Times reports that, according to DTZ, outstanding debt of global commercial real estate is valued at $ 6.8 trillion, of which $ 2.4 trillion matures in the next 2 years. (Property: Overarching Problems. Financial Times, 26.01.2011). Approximately one-third of commercial property is currently valued at less than its mortgage value.

A range of other factors will contribute to hesitant capital flows into Greece, including:

·Political instability in the Gulf Region. A major focus of the Greek government’s investment drive has been on getting Qatari and other investors from the Gulf to invest in Greece. With Bahrain currently in upheaval, Dubai in the process of debt restructuring, and major uncertainty regarding Iran, it is likely that Gulf capital will seek safe havens in Switzerland or the United States rather than in a high-risk country like Greece.

·European bank capital ratios are much less robust than one would expect. The continual and impending exposure to Irish and Spanish banks as well as Greek government bonds definitely puts a damper on enthusiasm for major investments in Greece, even in the private sector.

·Other exogenous factors, such as a potential slow-down of China, rising oil prices, and sector shocks in the United States may materialise in 2011-2015.

In short, it is extremely difficult to see where the finance for a EUR 50 billion privatisation drive in Greece would come from, even if the political will and the investor interest were present. With the government apparently eager to put as many obstacles to foreign investment as possible, and with the looming debt restructuring still to resolve, I do not believe this target will materialise. This is not to say it is not a praiseworthy target: I support it implicitly, although I would expect it might take 10 years to deliver, i.e. to 2020, rather than 5.

But we should be aware of the realities surrounding decision-making and implementation in Greece. Since these have not fundamentally changed to favour rational, effective governance, it means that delivering on a EUR 50 billion privatisation programme by 2015 will be extremely difficult, if not impossible, to achieve.

Sunday, 6 February 2011

One of the most bizarre and last-minute ideas recently raised by Greece’s Prime Minister was to make a trip to Egypt to discuss with embattled President Hosni Mubarak the EU’s and Greece’s ideas for ending the conflict. This issue was apparently raised at Mr. Papandreou’s initiative during theEU summit on Friday, and according to various Greek evening news programmes was cancelled by Saturday, some 24 hours later.

As with other spur-of-the-moment initiatives proposed by the Prime Minister, such as Greece’s plan for Balkan EU entry by 2014, or theMediterranean Climate Change Initiative, this plan is an example of well-meaning hubris which, though born perhaps of good intentions, does little to encourage our opinion that the country is effectively lead.

Greeceis undergoing the most far-reaching and wrenching change to public administration and economic life since the German occupation in 1941. The threat of a default has not subsided, and there continues to be no realistic plan for repaying EUR 330 bln in central government debt, let alone preparingGreecefor the wrenching economic and social changes we can expect in this coming decade, let alone in this coming year.

At this time, the government’s efforts should be fully concentrated on making this transition work, namely:

·Implementing the Memorandum to the letter and spirit of the agreement. Urgent solutions are needed to liberalise professions and deregulate the economy, particularly public transport which recently added over EUR 12 bln in debt to the central government. Much more progress is needed in meeting income targets and achieving real structural change.

·Dealing with the short-term economic and social crisis which the Memorandum (and more properly speaking, Greek government policies over generations) has caused by continuing to cut waste, refocus government efforts, and deal with issues such as the 13% unemployment rate and the high rate of business closure.

·Implementing critical reforms which have not been mentioned in the Memorandum, namely streamlining and eliminating bureaucracy; developing a real investment attraction programme; reforming the judiciary; qualitative reform of education and public health, and others.

·Determining an economic policy which responds to the paradigm shifts in competitiveness which arise from Asian, Mediterranean and Balkan competitors. This must include a plan for employment and human capital productivity.

Moreover, it is difficult to see what roleGreececan play inEgypt. It is not a major trading partner (likeFranceorGermany), nor a major strategic supporter, like theUnited States. NeitherGreecenor Mr. Papandreou figure largely in President Mubarak’s calculations of his own survival, nor are they a factor in the secular opposition or in the Muslim Brotherhood. Other far more qualified interlocutors, such as Tayip Erdogan, the Prime Minister of Turkey or Amr Moussa, the Secretary General of the Arab League, are sitting this one out (or are visiting the demonstrators). The European Union has a Vice President for External Relations, Lady Catherine Ashton, or it can send Herman Van Rompuy, President of the European Council. What makes Mr. Papandreou think his own credentials carry more weight, or provide greater access, than any of these other figures?

Greeceneeds a turn-around plan to extricate it from the current crisis and prepare its citizens for the future. Travelling toEgyptdoes nothing to support this. Mr. Papandreou should stay home and implement the tasks for which he has been elected, and to which he has agreed since coming into office.

Wednesday, 2 February 2011

The recent NYT article about competitiveness in Greece (What’s Broken in Greece? Ask an Entrepreneur – January 29, 2011) leaves several important factors unexplained, and thus does little justice to the complexity of the situation. Although the general conclusions or recommendations that Greece needs to improve its competitiveness and deregulate certain sectors are certainly warranted, I was struck by the fact that the entrepreneur in question, Mr. Politopoulos of Macedonian Thrace Brewery, is hardly an example of good competitiveness or wise investment planning, and that no amount of deregulation is likely to improve his situation in his core market.

This is understandable only if one reviews the basic economics and business of beer production and distribution, and of the two companies in question. To put it mildly, a smaller player like Macedonian Thrace Brewery faces major commercial difficulty in competing against the Athens Brewery (the brewer of Heineken/Amstel) and this has little to do with deregulation:

·Besides its dominant market position, the Athens Brewery has invested in a highly efficient distribution system which is optimised to Greece’s fragmented distribution system, characterised by many small retail points of sale, geographic fragmentation in the islands and extremely high variable demand between winter and summer seasons. In addition to the provision of equipment (refrigerators, taps, etc.), Heineken has the commercial power to offer generous credit terms to its customers, which is a key competitive advantage.

·The Athens Brewery is located in Athens, the largest urban region in Greece with some 4 million inhabitants in the greater area, as well as in Thessaloniki, the second largest urban area with 1 million inhabitants. The Macedonian-Thrace Brewery, in contrast, is located in Komotini, a small town of 52,000 people about 250 km from Thessaloniki. This distance is a major competitive disadvantage, particularly given the high fuel costs in Greece. In many breweries, the direct costs of production are equalled and in some cases exceeded by the costs of transport, distribution, and advertising & promotion. Transporting beer 750 km from Komotini to Athens incurs major costs which cannot easily be absorbed, and which deregulation will not necessarily improve.

·The Athens Brewery’s turnover in 2009 amounted to EUR 448.3 million, while its total fixed assets amounted to EUR 471.98 mln. Of this, accounts receivable amounted to 65.3 mln. A total of EUR 38.2 mln was invested in marketing, advertising and promotion in 2009. These basic financial indicators reveal the importance of (a) economies of scale in production; (b) the need for relative high accounts receivable (credit terms) and (c) the importance in marketing and promotion.

·Macedonian Thrace Brewery is clearly both undercapitalised and, it would appear, poorly planned from the outset. The interview with Mr. Politopoulos reveals his lack of experience in the brewery sector, which is determined not only by production capacity, but by the ability to enter a complex, fragmented distribution chain which is dominated by wholesellers and large retail chains requiring large credit terms and frequent replenishment. The company is clearly not spending nearly enough on consumer promotion, trade marketing, or distribution, and is thus shutting itself out of the market.

·I was amused to read that In emerging economies from Brazil to Turkey, South Africa and Mexico, beer companies have spun extraordinary profits. Mr. Politopoulos hoped to replicate this pattern. This is quite true, and I have in fact acted as a consultant to several breweries in emerging markets in the former Soviet Union and can attest to this. However, these breweries have started with a much greater economy of scale (basic investments on the scale of EUR 40-60 million are common), while Mr. Politopoulos and the NYT must also be aware that many breweries in emerging markets have also failed. Presence alone in an emerging market is no guarantee of success.

·There is no indication that, even if the law mentioned by Mr. Politopoulos were rescinded, the factory would be able to break even on tea sales. There are at least three solutions to the problem of a single-use factory, if indeed this exists. (It would have been better had the exact requirements of this law been confirmed by other sources).

·Nor would a Competition Committee finding on market dominance necessarily lead to greater sales for Macedonian Thrace Brewery, particularly in the Athens region. This is over 750 km from Macedonian Thrace Brewery in Komotini, and will therefore require a further investment in a distribution centre, staff and transport capacity, or a distribution partner. Either way, this is going to cost money or margin.

I also seriously question why it is remarkable that Heineken beer sold in Greece is more expensive than Heineken beer sold in Holland. There are three main reasons for this:

·Greece increased its excise duties on beer production three times in 2010 by a total of 80%. Greece also increased its value-added tax (VAT) to an maximum rate of 23%, applicable to alcoholic beverages, and also passed a special tax on alcohol. The Netherlands has a VAT rate of 19%.

·Economies of scale are greater in The Netherlands, which has a consolidated beer volume of 5.0 mln hectolitres, versus Greece, which has a consolidated beer volume of 3.2 mln hectolitres.

·Greek costs will be higher due to the need to import equipment and certain raw materials, which incur higher transport costs, than equipment and raw materials in The Netherlands. This includes higher packaging prices.

In short, I found this case study on competitiveness in Greece to be, frankly, peculiar. The article has taken one of the strangest business cases available involving two private companies, without a proper assessment of the economics of the beer distribution business or other basic factors in the Greek market. It appears to take the opinions of one company, Macedonian Thrace, as established fact, without cross-checking with other sources. It appears to mix the message that because Heineken is dominant in Greece, it must be an example of poor regulation, ignoring the fact that Heineken has been losing market share for years, and ignoring the history of the Amstel/Heineken merger. It also ignores the fact that Athens Brewery owes its market share not only to domestic production, but also to own imports; and that there is as of yet no finding of the Competition Committee or any other source which proves market dominance.

I could just as easily make the case that because a small, failing software firm in Boise, Idaho, is having problems, and because Microsoft has a 90% market share, then Microsoft must be the evil market leader which stifles innovation, and the United States must be poorly regulated and uncompetitive as a result. It’s an attractive conclusion, but it’s not necessarily the correct one.

General Competitiveness in Greece

I would also like to add a few words about general competitiveness. While it’s true that Greece’s exports as a share of GDP have been low, we should not forget that its two leading industries—shipping and tourism—are in fact service sector exports. Tourism accounted for between 15-20% of GDP in 2010 (depending on the methodology used), while shipping accounted for between 5-8% of GDP. Both sectors overwhelmingly serve international business. Over 92% of shipping value is incurred on non-Greek transport; over 87% of tourism receipts are from international arrivals in Greece. It is therefore not surprising that in the past, a good share of Greek domestic production is sold domestically, particularly in key segments such as construction, building materials, agricultural products and processed foods.

Greece’s record on attracting foreign investment is also better than would be believed by the article. Besides the example of Heineken itself, the Greek food and drinks sector includes production facilities by Barilla, Unilever, Nestle, Kraft Foods, Diageo, Coca Cola / Hellenic Bottlers and a range of other companies, while big-box food retail is dominated by international chains Carrefour, Delhaize, Lidl, Metro, Praktiker, Spar, and others. No mention is made of these investments, nor of equivalent investments by Greece’s national companies. We should remember that foreign direct investment, while a popular development indicator, is not by itself a final arbiter of national competitiveness. One could even argue the opposite.

There are, in fact, major problems with Greek competitiveness, but I would argue that these have more to do with other more important factors, namely:

·The need to improve the independence, transparency, effectiveness and professionalism of the judiciary;

·The need to lift Parliamentary immunity and prosecute past instances of corruption in public procurement;

·The need to end public sector domination of certain economic segments;

·The need to end a costly system of EU subsidies which is inflationary, is channelled almost exclusively through government agencies (engendering corruption and driving up costs), which is entirely supply-side oriented and which is not as efficient as it could be in furthering general competitiveness, innovation or demand-side orientation (including export orientation).

These issues have not been touched in the article.

In contrast, liberalising pharmacies, transport firms or legal fees is an minor point. The fact that Greece may have a high number of laywers is hardly important, given that general legal costs (both for lawyers, as well as in terms of legal awards) are far, far lower than more litigious countries such as the United Kingdom or the United States. The costs of the four points mentioned is far higher than the liberalisation of some professions, and unfortunately is not being systematically and transparently addressed either by the “Troika” or by any other political authority in Greece.

While I can’t help but wishing Mr. Politopoulos the best, I will probably stick to drinking Heineken or Corona beer, unless he can convince me otherwise.

Subscribe via email

Comments on the Blog

I will post any and all comments to this blog, providing they respond to a specific post in a relevant manner, do not contain profanity or ad hominem attacks, and otherwise contribute to civilised discourse. If you do post a comment, please include your email if you wish a response - Blogger does not provide email addresses otherwise.